Beleaguered Internet company Yahoo (NASDAQ:YHOO) is due to report fourth quarter 2015 earnings on 2nd February 2016 after market close. Wall Street expects Yahoo to report EPS of $0.05 vs. $0.2 posted by the company during the prior year’s comparable quarter (Source: NASDAQ). Yahoo cut its fourth quarter revenue guidance in October to a lower range of 1.16B-$1.2B, with the midpoint being marginally lower than current Wall Street consensus of $1.19B (Source: Yahoo Finance).

Yahoo has managed to meet or exceed lowered earnings expectations in three out of the four last quarters.

Yahoo Earnings Surprise History

Fiscal
Quarter End

Date
Reported

Earnings
Per Share

Consensus
EPS* Forecast

%
Surprise

Sep2015

10/20/2015

0.11

0.07

57.14

Jun2015

07/21/2015

0.03

0.05

-40

Mar2015

04/21/2015

0.07

0.07

Met

Dec2014

01/27/2015

0.2

0.19

5.26

Source: NASDAQ

Despite all its woes, Yahoo carries a strong buy rating on Wall Street, and for good reason.

Source: NASDAQ

Yahoo’s Last Roundup Bears Significant Value Anyway You cut it

It’s an open secret that most investors have already given up on Marissa Mayer’s turnaround attempts of Yahoo’s flagging business, and are now primarily focused on how the company can unlock shareholder value either by spinning off its core Internet business or by spinning off its 15% stake in Alibaba (NYSE:BABA). Several activist investors have ganged up against Yahoo and are applying pressure on its management to expedite the spin-off process.

At the moment, the consensus is that it would be more prudent to spinoff Yahoo’s core Internet business instead of the earlier plan to sell its Alibaba stake due to the uncertainty regarding whether or not the IRS would tax the transaction. Starboard is one of the leading activist investors who have been applying pressure on Yahoo’s management to sell its core Internet business. Here is an excerpt of the letter the firm recently sent to Yahoo’s management:

Despite our continued belief that the proposed spin-off of Aabaco Holdings should be deemed tax free under current law, we believe it is important to note the market's assessment of the current strategy. Irrespective of the impending tax-free spin-off, it is clear the market has a dim view of the Company's current strategy. As shown on the table below, the market either discounts the tax benefits of the proposed spin-off and/or, worse, implies a significantly negative value for the Core Business based on a justifiable fear that the current turnaround efforts will fail and current management will continue to squander the Company's resources. At best, the current stock price implies a meager ~2x consensus 2015 EBITDA multiple on the Core Business.

Starboard’s main gripe is that Yahoo is grossly undervalued, a sentiment that resonates strongly with views across Wall Street and Yahoo investors:

Implied value for Yahoo's Core Business (in millions of $)

Current YHOO Enterprise Value

$31,230

Less: Alibaba Group stake at 38% discount

($18,622)

Less: Yahoo Japan stake at 38% discount

($5,019)

Less: Net cash

($5,572)

Implied value of Core Business

$2,017

2015E EBITDA

$926

Implied 2015E EV/EBITDA multiple

2.2x

2016E EBITDA

$838

Implied 2016E EV/EBITDA multiple

2.4x

Source: Company filings, Bloomberg, and Starboard Value estimates.

Note: As of November 17, 2015.

Source: PR Newswire

Interestingly enough, Starboard’s Yahoo undervaluation mime is supported by Verizon (NYSE:VZ) and its July 2015 acquisition of AOL. Verizon recently expressed interest in buying Yahoo’s core business. Verizon paid 7x EBITDA for AOL, never mind the fact that AOL still relies heavily on its moribund dial-up business. Most Internet companies sport a valuation of ~11x EBITDA, and Yahoo’s 2.4X EBITDA is laughable at best since Yahoo’s core business is decidedly more valuable than AOL’s.

Starboard recently threatened a proxy war on Yahoo unless the company agrees to oust Miss Mayer and several top directors from its board. Yahoo declined to comment on the matter, ostensibly due to fears about its upcoming earnings call.

A few days ago, Canyon Capital Investors sent a letter to Yahoo’s board asking it not to waste any more capital and instead prioritize sale of part or all of its assets. Canyon’s comments were in regard to Yahoo’s $3B+ worth of acquisitions under Marissa’s 3½- year tenure, most of which have done nothing to slow down the revenue tailspin at the company.

Heads you win, tails you win

Yahoo shares have been rallying lately after a column on Barron’s said that the shares have an upside potential of at least 35% even if Yahoo takes the more risky route and spins off its Alibaba stake. Barron works out Yahoo’s value at $40/share (current price is $29.75) assuming Yahoo spins off its Alibaba stake and the IRS taxes the transaction $7B. Spinning off Yahoo’s core business instead could fetch significantly better valuation for Yahoo.

Investor Takeaway

Many investors seem to have already given up on the revival of Yahoo’s business, and will instead be focusing on whether the company’s management will issue a roadmap regarding sale of part or all of its assets. If Yahoo’s management discusses the subject during the Yahoo Q4 2015 earnings call, Yahoo stock price could rally significantly. At this juncture a lot of bad news is baked into Yahoo stock price and another bad quarterly report might not pull down the shares too much since investors have been conditioned to expect it.

Yahoo Stock Articles & Video

Google continues to launch new applications to innovate and acquire new revenue streams. EU antitrust charges on android is a major concern, which may affect the stock price in the short term. Valuation shows some mixed signs - the stock appears to be relatively inexpensive but may also not a bargain.

Yahoo shares have been sliding since the company uncovered a massive data breach. Verizon, which had agreed to purchase Yahoo's core, is likely to use this revelation to renegotiate the price lower. After gaining nearly 30% YTD, do Yahoo shares have any upside left?

Verizon will acquire Yahoo's operating business for $4. 83 billion in cash. The acquisition follows the 2015 acquisition of AOL. Yahoo web properties, including email, News, Sports and Finance, have 200 million unique monthly visitors, many of them on mobile devices. Verizon wants to be a top global mobile media company, and accelerate its revenue stream in the $187 billion digital advertising market.

Yahoo reported Q2 earnings and refused to disclose further info about the sale process. The Mozilla payment clause, Tumblr write-off, and weak core results put pressure on the deal price. Even though the sale will be closed soon, investors should be ready for a downside scenario.

After an endless process to sell the company’s core business, Yahoo is finally approaching the end. Yahoo will announce the third bidding round results and acquisition terms. Operating results are secondary to the selling process announcement.

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